Friday, July 10, 2009

Don't put all of your money in one investment

By Dan Danford

You need fish. For the sake of illustration, let’s pretend you own a seafood restaurant and you need fresh fish every single day. In a sense, your business – your very livelihood – depends on the fisherman’s ability to catch fish daily in the varieties and quantities you need.

Now, nothing can be easier or cheaper than using just one fisherman. He ventures out each morning, returns around noon, and you meet him at the dock when he arrives. The fish are fresh and his schedule predictable. Besides that, Mr. Fisherman is delighted to sign a contract giving you preferred prices.

There’s only one small catch (you’ve already spotted it, haven’t you?). Sometimes the fish don’t bite. Mr. Fisherman meets you at the dock with an empty creel. Franticly, you race from boat to boat to boat seeking tonight’s red snapper. Too late, you discover that today’s bay is empty. The fish moved on during the night. Perhaps tomorrow will be better.

Tomorrow? What about today? There’s an anniversary party … and a business meeting … lunch customers already waiting … well, you get the picture. Tomorrow is too late, and crisis is a bad time to learn anything.

Looking back, one lesson is pretty clear. You can’t rely on one fisherman or just one bay. Instead, you need several (maybe dozens) of fisherman working with a variety of bays, baits, and boats. Good fisherman, all, but each subject to the ocean’s movement and whims. When one fails, another succeeds. Through variety, you develop a reliable source of fish for your restaurant. And, a safety net for your livelihood.

Mutual funds and investment managers are a lot like those fishermen. By design, they use certain techniques in certain waters. They are experts at catching fish, but only when fish in their part of the bay are biting. Otherwise, they troll for the day when fish return. That’s their job and they do it rather well.

My job is to develop reliable sources of growth. We build a network of solid managers operating in a variety of strategic environments – a portfolio. We diversify to include different kinds of investments and different kinds of managers. Through diversity, we build a safety net for the future.

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